Wednesday, August 17, 2022

A Major Change Is Coming to Wall Street and Corporate America

President Biden is set to sign a measure that will displease investors and financiers. But the bill also addresses a practice that's been severely criticized.

It's a masterstroke that went almost unnoticed on Main Street. 

But it has not escaped the attention of Wall Street, which will not be pleased with this move by the Democrats.

In President Joe Biden's bill addressing climate change and health care, the Inflation Reduction Act, companies for the first time face a tax on stock buybacks.  

Companies will pay a 1% excise tax on purchases of their own shares, a kind of financial penalty for this move, which is intended to return cash to shareholders and boost share prices. For example, a company buying shares valued at $1 billion will pay $10 million of taxes. 

The goal is to encourage companies to increase the wages of their employees and to invest in the companies themselves rather than favoring shareholders -- and more particularly activist shareholders in search of quick returns.

Biden will is set to sign the overall bill on Aug. 16, and the buyback tax will be effective beginning Jan. 1. The excise tax is projected to bring the government an additional $74 billion in revenue over 10 years.

Share-Buyback Frenzy

Democrats hope this new tax will be the catalyst for a major change in corporate behavior. 

Companies in the benchmark S&P 500 index bought a record $881.7 billion of their shares in 2021, up 70% from $519.8 billion in 2020, according to a recent report from S&P Dow Jones Indices.

The previous record was $804.6 billion in 2018.

"Current indications are that companies have maintained their buybacks through the recent downturn, which means they'll be getting more shares for their expenditures and reducing share count even further, resulting in higher [earnings per share]," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

He added: "Given the strong base buying, expected earnings, even with a potential consumer slowdown and lower margins, buybacks could set another record in 2022."

Big Tech is one of the most popular sectors for share buybacks. It is followed by companies in the financial, energy and communication services sectors. 

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